Generale Bank Nederland NV (formerly Credit Lyonnais Bank Nederland NV) v Export Credits Guarantee Department
| Jurisdiction | England & Wales |
| Judge | LORD SLYNN OF HADLEY,LORD WOOLF,LORD STEYN,LORD CLYDE,LORD MILLETT |
| Judgment Date | 18 February 1999 |
| Judgment citation (vLex) | [1999] UKHL J0218-1 |
| Date | 18 February 1999 |
| Court | House of Lords |
[1999] UKHL J0218-1
Lord Slynn of Hadley
Lord Woolf
Lord Steyn
Lord Clyde
Lord Millett
HOUSE OF LORDS
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Woolf M.R. For the reasons he gives I too would dismiss the appeal.
My Lords,
This is an appeal by the Generale Bank Nederland N.V. (formerly Credit Lyonnais Bank Nederland N.V.) ("the Bank") from the decision of the Court of Appeal (Stuart-Smith, Hobhouse and Thorpe L.JJ.) [1998] 1 Lloyd's Rep. 19. The Court of Appeal dismissed the Bank's appeal from the decision of Longmore J. [1996] 1 Lloyd's Rep. 200). He held that the Export Credit Guarantee Department ("E.C.G.D.") was not liable to the Bank for the loss which the Bank has sustained due to the fraud of one of its customers in which an employee of E.C.G.D. was involved.
As the action has proceeded through the courts, many of the issues between the parties have been resolved so that there is now only one issue which we have to determine. This issue was accurately and succinctly identified by Stuart-Smith L.J. in his judgment (p. 36 col. 2) in these words:
"Where A becomes liable to B as a joint tortfeasor with C in the tort of deceit practised by C on B on the basis that A and C have a common design to defraud B and A renders assistance to C pursuant to and in furtherance of the common design, does D, A's employer, become vicariously liable to B, simply because the act of assistance, which is not itself the deceit, is in the course of A's employment with D?"
Surprisingly, having regard to its nature it is accepted by counsel that the issue has not been previously decided.
The Facts
The hearing before Longmore J. lasted 28 days. The facts giving rise to the Bank's loss were investigated in depth. However, in order to decide the remaining issue it is not necessary to do more than describe briefly what happened.
The central figure in the fraud was a rogue named Roland Chong. He came to this country from Singapore in 1980. As Longmore J. found:
"He knew about ways of financing international trade and persuaded the bank that he was a considerable exporter of commercial goods to Nigeria and America. He was aware that exporters could get insurance from the Export Credit Guarantee Department (E.C.G.D.) against the risk of non-payment by the foreign buyer; he was also aware that the bank could be induced to purchase bills of exchange drawn by an exporter on foreign buyers against a guarantee from E.C.G.D. that the foreign buyer would pay for the goods in due course according to the contract of sale. Mr. Chong had the bright idea of conjuring up wholly imaginary contracts for the sale of goods supported by fraudulently drawn bills of exchange with forged acceptances in the name of imaginary buyers. He obtained money from the bank by selling to it these pieces of paper in the form of accepted bills of exchange; he initially covered his tracks by causing early bills of exchange to be paid off, using for this purpose money he acquired from the bank's purchases of later bills of exchange. He corrupted a senior officer of E.C.G.D., a Mr. Pillai, who dealt with the underwriting of E.C.G.D. guarantees, inducing him to oil the wheels and ensure no awkward questions would be asked. When he had obtained over £10m. of the bank's money, he disappeared."
The E.C.G.D. has now been privatised. However at the time it was a part of Central Government. It issued the guarantees to assist United Kingdom exporters to which the judge refers. The guarantees were intended to ensure that, in the event of default on the part of an overseas buyer, the exporter would be paid ninety per cent. of the purchase price. This can be valuable to exporters who need to obtain immediate finance for their exports. The guarantees would make it easier for exporters to obtain finance from their bankers by way of loan. The loans would be on the security or following the sale of bills of exchange drawn on and frequently accepted by an overseas buyer which were payable at a future date. E.C.G.D. co-operated with such arrangements by issuing guarantees to the exporters' bank.
Starting in 1983, E.C.G.D. issued a series of guarantees to the Bank in relation to purchases from Mr. Chong of bills of exchange drawn in respect of fictitious export transactions entered into by companies which he owned or controlled. Initially the guarantees were in the form of Comprehensive Bankers Guarantees ("C.B.G."). C.B.G.s provided cover in relation to a number of transactions. The first C.B.G. was issued in July 1983 and altogether nine C.B.G.s were issued between 1983 and 1985. A number of bills of exchange and promissory notes were purchased by the Bank under each C.B.G. Some of the bills and notes were honoured and some were paid later without any substantial loss to the bank. In 1987 and 1988 E.C.G.D. issued guarantees in the form of Specific Bankers Guarantees ("S.B.G.s"). S.B.G.s guaranteed bills relating to specific contracts for capital goods. This appeal concerns four S.B.G.s which were issued in respect of four imaginary export transactions between December 1987 and April 1988.
Mr. Pillai was a senior underwriter of E.C.G.D. although he was only a relatively junior civil servant. He dealt with the issue of the four S.B.G.s. The Court of Appeal held that at the time that he authorised their issue Mr. Pillai was party to a common design with Mr. Chong to deceive the Bank and that he had the requisite knowledge and complicity in Mr. Chong's frauds to make him liable to the Bank as a joint tortfeasor with Mr. Chong. E.C.G.D. accepts that this is the position.
The Bank initially advanced its claim against E.C.G.D. both in contract and in tort. In contract, it claimed that E.C.G.D.'s guarantees secured payment of the bills bought by the Bank. In tort, it claimed that the E.C.G.D. was vicariously liable for the acts of Mr. Pillai in underwriting the guarantees. This was his essential role in the scheme.
The claim in contract is not pursued on this appeal. As for the Bank's claim in tort, a distinction has to be drawn between the claims relating to a transaction backed by one of the C.B.G.s and the subsequent transactions involving the S.B.G.s. As to the C.B.G.s the Bank does not now challenge the finding of the judge that while at the time of the transaction Mr. Pillai had been corrupted as a result of receiving bribes from Mr. Chong he did not yet have the requisite knowledge and complicity in Mr. Chong's frauds to be liable to the Bank as a joint tortfeasor with Mr. Chong. However in relation to the four S.B.G.s, the Court of Appeal held (and this is now accepted by E.C.G.D.) that by the time Mr. Pillai authorised their issue he was a party to a common design with Mr. Chong to deceive the Bank by a fraud of which the issue of the S.B.G.s was an essential part.
In the case of each of the S.B.G.s the bills of exchange and other documents presented to the Bank by Mr. Chong were forged. The supposed purchasers existed and were highly respectable but the contractual documents and the bills of exchange purportedly accepted by the buyers were forged and the buyers knew nothing of the supposed transactions executed in their names. Mr. Pillai had not forged any documents himself and the Court of Appeal held that there was nothing unlawful in issuing the S.B.G.s. It is set out in the statement of facts agreed for this appeal that "it would not have been within the course of his employment or the scope of his authority" for Mr. Pillai to do the acts by which the Bank was deceived. Mr. Pillai in addition, signed letters on the note paper of E.C.G.D. indicating that the transactions were acceptable to E.C.G.D. However, Mr. Pillai had no authority actual or ostensible to write these letters and the letters were not written within the scope of his employment.
None of the Bank's employees were parties to the fraudulent scheme. Nor was there held to be any complicity or bad faith on their part. The official of the Bank who primarily dealt with Mr. Chong was a Mr. Herod. On the Judge's findings, and in the opinion of the members of the Court of Appeal, Mr. Herod, in particular, and the Bank, in general, displayed a remarkable lack of caution in entering into the S.B.G. transactions. Hobhouse L.J. summarised the position at the end of his judgment in these terms:
"The department still has a strong case that the conduct of Mr. Herod and the bank was reckless and that the bank chose to pay money to Mr. Chong's companies without regard to the E.C.G.D. scheme under which they were purporting to operate. Their apparently systematic disregard of the essential features of that scheme including its obviously precautionary features might be capable of supporting an inference sufficient to destroy the causal connection between their losses and the conduct of Mr. Pillai for which it is alleged that the department should be vicariously liable." (p. 47 cols. 1-2)
It was this conduct on the part of the Bank and its employee which was fatal to the Bank's claim in contract. The S.B.G.s guaranteed payment of the principal element of the sum on the face of the bill if the bill remained unpaid three months after due date of payment. However, the guarantees were confined to bills "in connection with which the bank had taken all reasonable steps to satisfy itself as to its validity and enforceability in the buyer's country …." As the Bank had not taken those steps E.C.G.D. was not liable under the guarantees.
The Court of Appeal having come to the conclusion that the E.C.G.D. was not vicariously...
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